Fortinet (FTNT) Down 18% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Fortinet (FTNT). Shares have lost about 18% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Fortinet due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Fortinet's Q4 Earnings & Revenues Top Estimates

Fortinet delivered fourth-quarter 2019 non-GAAP earnings per share of 76 cents, which beat the Zacks Consensus Estimate of 70 cents and also improved significantly from the year-ago figure of 59 cents.

Moreover, revenues of $614 million surpassed the consensus estimate of $604 million and also increased 21% year over year, driven by advanced FortiGate technology with SPU, integrated Security Fabric platform and hybrid multi-cloud offerings.

Quarter in Detail

Segment wise, Product revenues increased 19% year over year to $238.8 million. The growth was driven by legacy firewall use cases and continued adoption of FortiGate based secure SD-WAN solution.

Services revenues rose 23% to $375.6 million. Notably, FortiGuard security subscription revenues grew 24% to $205 million. FortiCare technical support and other service revenues increased 21% to $170 million.

Billings were up 24% to $802 million, driven by solid execution and growth across EMEA and APAC.

During the quarter, the company secured 64 total deals worth more than $1 million. Secure SD-WAN was a leading contributor to growth in the number of deals in excess of $1 million.

The number of deals more than $250,000 rose 29% to 469 and the number of deals over $500K was up 53% to 197.

Geographically, revenues in America were up 23%, APAC up 22%, and EMEA up 19%.

Margins

Gross margin expanded 230 basis points (bps) year over year to 78%. Also, services gross margin expanded 90 bps to 88.2% as well as product gross margin grew 400 bps to 60.9%.

Non-GAAP operating income surged 31.3% to $529.2 million while non-GAAP operating margin expanded 110 bps to 27%.

Rise in the pace of hiring, mostly in sales and marketing, lower sales attrition and M&A spends were overhangs on margin.

Balance Sheet & Cash Flow

Fortinet exited the reported quarter with cash and cash equivalents, and short-term investments of approximately $2.07 billion, up from $1.94 billion recorded at the end of the previous quarter.

During the fourth quarter, the company generated operating cash flow of $190.4 million compared with $221.2 million in the previous quarter. Free cash flow was $143.2 million compared with $203.7 million in the third quarter.

In the fourth quarter, the company purchased approximately 303,000 shares of common stock for $23 million.

The company repurchased 1.9 million shares for $141 million in 2019.

Guidance

For 2020, the company expects revenues in the range of $2.525-$2.555 billion.

Moreover, non-GAAP earnings per share are anticipated in the range of $2.70-$2.73.

For 2020, billings are expected within $3.025-$3.075 billion.

Non-GAAP gross margin is projected in the range of 77.5-78.5%. Non-GAAP operating margin is anticipated between 23.5% and 24.5%.

For the first quarter of 2020, the company expects revenues of $555-$565 million. Billings are estimated in the band of $635-$655 million.

Non-GAAP earnings per share are envisioned within 50-52 cents.

Non-GAAP gross margin is expected in the range of 77.5-78.5% whereas non-GAAP operating margin is anticipated between 19% and 20%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Fortinet has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Fortinet has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.